{"id":21996,"date":"2024-07-31T09:00:42","date_gmt":"2024-07-31T13:00:42","guid":{"rendered":"https:\/\/www.foundationsoft.com\/?p=21996"},"modified":"2025-05-29T10:10:03","modified_gmt":"2025-05-29T14:10:03","slug":"the-importance-of-backlogs-in-the-construction-industry","status":"publish","type":"post","link":"https:\/\/www.foundationsoft.com\/learn\/the-importance-of-backlogs-in-the-construction-industry\/","title":{"rendered":"The Importance of a Construction Backlog for Contractors"},"content":{"rendered":"<p>Successful <a href=\"https:\/\/www.foundationsoft.com\/\">contractors<\/a> are always planning ahead to make sure they have plenty of jobs scheduled. \u00a0This process is also referred to as building a <strong>construction backlog. <\/strong><\/p>\n<p>Tracking your backlog allows you to <strong>forecast future earnings<\/strong>, <strong>allocate the proper resources for each project,<\/strong> and <strong>ensure projects are delivered on time and within budget<\/strong>.<\/p>\n<p>A backlog in construction provides valuable insights regarding a company\u2019s workload and potential revenue and serves as a great tool to forecast growth.<\/p>\n<a target=\"_blank\" href=\"\/demo-video-player\/\" class=\"blog-cta-image\"><img decoding=\"async\" src=\"\/wp-content\/uploads\/2024\/03\/FSL-blog-post-ad-fsl-in-action.png\" alt=\"Watch a Demo\" title=\"Watch a Demo\"><\/a>\n<p>Keep reading to learn how backlogs have a direct impact on your operations, how to build the best backlog for your company, and how to balance and manage it effectively.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Key_Takeaways_About_Backlogs_in_Construction\"><\/span><strong>Key Takeaways About Backlogs in Construction<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ul class=\"wp-block-list\">\n<li>Creating a construction backlog gives you <strong>greater control over your cash flow<\/strong> to determine your <strong>company\u2019s profitability<\/strong>.<\/li>\n<li>A nonexistent, limited, or inaccurate backlog puts <strong>undue financial stress<\/strong> on your company.<\/li>\n<li>Compiling <strong>too much<\/strong> of a backlog could lead to <strong>missed deadlines<\/strong> and a perception from others that your company underdelivers or stretches itself too thin.<\/li>\n<li>Accurately <strong>measure your backlog<\/strong> levels by building job profiles, leveraging available resources to determine your workload capacity, and reviewing timelines and expected profitability.<\/li>\n<li>Begin building an <strong>accurate backlog<\/strong> by developing an effective job costing strategy to avoid cost overruns, leverage WIP reports, and assess past project performance.<\/li>\n<li><strong>Construction accounting software<\/strong> can help you <strong>manage your backlogs<\/strong> by giving you more insights into job costing, cash flow, and WIP reports.<\/li>\n<\/ul>\n<h2 class=\"PlaygroundEditorTheme__h2\" dir=\"ltr\"><span class=\"ez-toc-section\" id=\"What_Is_a_Backlog_in_Construction\"><\/span><b><strong class=\"PlaygroundEditorTheme__textBold\">What Is a Backlog in Construction?<\/strong><\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p class=\"PlaygroundEditorTheme__paragraph\" dir=\"ltr\">A construction backlog is the total dollar value of contracted work that has been awarded to a contractor but not yet completed or billed. This represents the company&#8217;s future revenue pipeline and includes all signed contracts, change orders, and committed projects scheduled for completion over the coming months.<\/p>\n<p class=\"PlaygroundEditorTheme__paragraph\" dir=\"ltr\">A well-managed backlog serves as a critical business metric that helps contractors:<\/p>\n<ul class=\"PlaygroundEditorTheme__ul\">\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"1\">Forecast revenue streams<\/li>\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"2\">Plan resource allocation<\/li>\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"3\">Maintain financial stability<\/li>\n<\/ul>\n<p class=\"PlaygroundEditorTheme__paragraph\" dir=\"ltr\">The backlog essentially acts as your company&#8217;s work inventory, providing visibility into upcoming project costs, timelines, and the steady flow of work that keeps revenue flowing.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_Danger_of_Not_Having_a_Backlog\"><\/span><strong>The Danger of Not Having a Backlog<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Contractors who do not have a degree of backlog or have a minimal number of scheduled jobs risk running out of work, putting their business in a precarious position.<\/p>\n<p>Without a healthy backlog of work, a contractor\u2019s business is essentially surviving job-to-job \u2014 which is not sustainable long term.<\/p>\n<p>The absence of a backlog means it\u2019s nearly impossible to accurately forecast <a href=\"https:\/\/www.foundationsoft.com\/learn\/strategies-for-monitoring-cash-flow\/\">cash flow<\/a> totals or the amount of money a contractor receives and spends throughout a project \u2014 forcing construction companies to rely more on their cash on hand and lines of credit. \u00a0<\/p>\n<p>Creating a backlog allows for greater control of cash flow, meaning your company can more easily allocate funds for current and future projects.<\/p>\n<p>An accurate backlog allows you to measure your profitability and capacity to take on future projects.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_to_Build_a_Backlog\"><\/span><strong>How to Build a Backlog<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>To create an accurate backlog, there are a few important steps you should take:<\/p>\n<h3><span class=\"ez-toc-section\" id=\"_1_Develop_an_Effective_Construction_Job_Costing_Strategy\"><\/span>\u00a0 \u00a0 \u00a0 1. Develop an Effective <strong>Construction Job Costing<\/strong> Strategy<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>When you establish an effective job cost structure, you can track every dollar spent to determine your current cash flow.<\/p>\n<p><strong>A positive cash flow means you\u2019re making money on a project<\/strong>, giving you more financial flexibility because the client is paying for the project.<\/p>\n<p>Whereas <strong>a negative cash flow shows that you\u2019re losing money, and any project expenses are coming directly from your company.<\/strong><\/p>\n<p>Accurately calculating your cash flow allows you to forecast and allocate the necessary funds across multiple projects.<\/p>\n<p>Ultimately, this gives you a better understanding of the types of jobs you can take on and when based on your cash flow over a certain period of time. It also helps improve your financial strength which is a good sign to prospective customers.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"_2_Leverage_WIP_Reports\"><\/span>\u00a0 \u00a0 \u00a0 2. Leverage WIP Reports<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Using a <a href=\"https:\/\/www.foundationsoft.com\/learn\/wip-report-field-guide\/\">work in progress (WIP)<\/a> report is key to balancing your backlog. WIP reports track the total costs of each construction project a contractor is currently working on, giving them increased visibility into where a project stands, the typical costs associated with it, and the potential revenue they can earn from their current projects.<\/p>\n<p>Contractors can also use WIP reports to identify when they need to increase their backlog because they can see their cash flow drying up.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"_3_Assess_Past_Project_Performance\"><\/span>\u00a0 \u00a0 \u00a0 \u00a03. Assess Past Project Performance<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Oftentimes, past projects can serve as an indicator for your company\u2019s ability to take on future, similar projects. Reviewing past performance, deadlines, and revenue earned from these projects can provide you with helpful insight as you build out your backlog.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_You_Should_Keep_in_Mind_When_Measuring_Your_Construction_Backlog\"><\/span><strong>What You Should Keep in Mind When Measuring Your Construction Backlog<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>While building a sizable backlog seems like a good idea, it\u2019s important to keep a few factors in mind to avoid potential pitfalls, such as overextending your team, which can lead to missed deadlines.<\/p>\n<p>\u00a0 \u00a0 \u00a0 1. Build Job Profiles<\/p>\n<p>Before building your backlog, it\u2019s important to have a particular type of job, or profile, in mind. This will allow you to create a potential time frame and estimate profitability for each profile<em> before <\/em><a href=\"https:\/\/www.foundationsoft.com\/learn\/how-to-bid-less-and-win-more-jobs\/\">bidding<\/a> so you can make more informed decisions on jobs you should pursue.<\/p>\n<p>\u00a0 \u00a0 \u00a0 \u00a02. Know When to Add to Your Backlog<\/p>\n<p>You should review the job profiles that make up your current backlog to determine expected timelines and profitability to decide when you should add to your backlog.<\/p>\n<p>If you feel that you won\u2019t come out profitably by the end of the fiscal year, or you\u2019re concerned about keeping all your workers employed through the slow season, then start adding more jobs to your portfolio.<\/p>\n<p>\u00a0 \u00a0 \u00a0 \u00a03. Leverage Available Resources to Determine Your Workload Capacity<\/p>\n<p>Establish a threshold based on WIP reports, workers\u2019 schedules, and equipment availability. This threshold will help you identify when to slow down or stop bidding on jobs to avoid building too much backlog.<\/p>\n<p>If your backlog becomes too large, it can lead to missed deadlines, and your company\u2019s reputation could be negatively affected, leading to project owners not selecting you for jobs in the future.<\/p>\n<p>\u00a0Before bidding on jobs, you should review your current backlog, WIP reports, resource availability, construction costs, and current cash flow to determine if adding more projects is beneficial at that time.<\/p>\n<p>\u00a0 \u00a0 \u00a0 \u00a04. Review Timelines and Expected Profitability<\/p>\n<p>Project owners value timeliness and quality of work when selecting a contractor during the bidding process.<\/p>\n<p>Keep in mind that a bloated backlog may rule out certain, more profitable opportunities because your wait times could be too long for some projects.<\/p>\n<p>Before building your bid, it\u2019s important to review the project information, your current backlog and forecast the resources you would have available during the project you\u2019re bidding on.<\/p>\n<p>You should also determine the profitability of the project and compare it to other projects you are planning to bid on to ensure you have the most profitable backlog possible.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Balancing_Your_Construction_Backlog\"><\/span><strong>Balancing Your Construction Backlog<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>A balanced construction backlog means having the right amount of work for your construction business. Enough that you can cover your expenses and<strong> bank a profit<\/strong> while not overstraining your workforce.<\/p>\n<p>\u00a0The process of creating a balanced construction backlog largely depends on the size of your company, your available resources, and the type of work you\u2019re being asked to complete.<\/p>\n<p>\u00a0 \u00a0 \u00a0 1. Why It\u2019s Important<\/p>\n<p>Building a balanced construction backlog means your company gains more visibility into critical insights, such as revenue streams and overall financial stability. You can also:<\/p>\n<ul class=\"wp-block-list\">\n<li>Have better resource allocation across multiple projects.<\/li>\n<li>Improve your company\u2019s reputation by successfully completing projects on time and within budget.<\/li>\n<li>Be more particular when selecting projects to pursue to maximize profits.<\/li>\n<\/ul>\n<p><strong>Effective backlog management<\/strong> allows you to keep a balanced backlog and sets you up to bid on future contracts and still hit client deadlines.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_Construction_Software_Can_Help_You_Manage_Your_Backlog\"><\/span><strong>How Construction Software Can Help You Manage Your Backlog<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Construction accounting software plays an important role in construction backlog management to help contractors build and maintain an accurate backlog. With construction accounting software, you can easily build and manage your backlog by:<\/p>\n<ul class=\"wp-block-list\">\n<li><strong>Accurately tracking job costing data<\/strong><\/li>\n<li><strong>Calculating cash flow<\/strong><\/li>\n<li><strong>Reviewing WIP reports<\/strong><\/li>\n<\/ul>\n<p><a href=\"https:\/\/www.foundationsoft.com\/learn\/essential-features-in-construction-accounting-software-infographic\/\">Construction accounting software<\/a> automates this information, so it updates during each step of your projects.<\/p>\n<a target=\"_blank\" href=\"\/construction-accounting-software-ebook\/\" class=\"blog-cta-image\"><img decoding=\"async\" src=\"\/wp-content\/uploads\/2024\/05\/2024-05-FSL-blog-post-ad-5-ways-ebook.png\" alt=\"eBook Download\" title=\"eBook Download\"><\/a>\n<p>Having access to this real-time information at a moment\u2019s notice means you can make the most informed decisions when building your backlog to avoid potential pitfalls while enhancing your profitability. This will help you deliver your contracts on time.\u00a0<\/p>\n<p>Additionally, <a href=\"https:\/\/www.foundationsoft.com\/\">FOUNDATION<\/a>\u00ae, a leading construction accounting software, can precisely calculate your cash flow, give you valuable insights into job costing data, and help you manage your WIP reports. \u00a0With FOUNDATION, you can easily measure and <strong>balance your construction backlog<\/strong> to maximize productivity and profitability while expanding your project portfolio.<\/p>\n<h2 class=\"PlaygroundEditorTheme__h2\" dir=\"ltr\"><span class=\"ez-toc-section\" id=\"Construction_Backlog_FAQs\"><\/span>Construction Backlog FAQs<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<h3 class=\"PlaygroundEditorTheme__h3\" dir=\"ltr\"><span class=\"ez-toc-section\" id=\"How_Much_Backlog_Should_a_Construction_Company_Have\"><\/span><b><strong class=\"PlaygroundEditorTheme__textBold\">How Much Backlog Should a Construction Company Have?<\/strong><\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p class=\"PlaygroundEditorTheme__paragraph\" dir=\"ltr\">Most construction companies aim for a backlog of 6-12 months of their annual revenue, but this depends on what kind of work you do and the size of your construction company. A specialty contractor doing quick turnaround jobs might be fine with just a few months lined up, while general contractors tackling major projects often need a year or more to feel secure.<\/p>\n<p class=\"PlaygroundEditorTheme__paragraph\" dir=\"ltr\">The sweet spot comes down to having enough contracted revenue to cover your project costs and keep crews busy without overloading the business.\u00a0<\/p>\n<h3 class=\"PlaygroundEditorTheme__paragraph\" dir=\"ltr\"><span class=\"ez-toc-section\" id=\"Why_Is_a_Large_Construction_Backlog_Bad\"><\/span><b><strong class=\"PlaygroundEditorTheme__textBold\">Why Is a Large Construction Backlog Bad?<\/strong><\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p class=\"PlaygroundEditorTheme__paragraph\" dir=\"ltr\">Too much backlog becomes a problem because potential clients won&#8217;t want to wait around for months before you can start their project.<\/p>\n<p class=\"PlaygroundEditorTheme__paragraph\" dir=\"ltr\">When your schedule gets packed too tight, you end up rushing through jobs, missing deadlines and stretching your crews thin, which hurts the quality of work and damages your reputation.<\/p>\n<p class=\"PlaygroundEditorTheme__paragraph\" dir=\"ltr\">Big backlogs also create financial strain since you&#8217;ve got all this future revenue tied up while missing out on better opportunities that pop up. Plus, when project timelines stretch out too long, you&#8217;re dealing with rising material costs and it becomes nearly impossible to create accurate forecasts for revenue streams, making the whole business harder to manage.<\/p>\n<h3 class=\"PlaygroundEditorTheme__h3\" dir=\"ltr\"><span class=\"ez-toc-section\" id=\"Can_Construction_Accounting_Software_Help_With_Construction_Backlogs\"><\/span><b><strong class=\"PlaygroundEditorTheme__textBold\">Can Construction Accounting Software Help With Construction Backlogs?<\/strong><\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p class=\"PlaygroundEditorTheme__paragraph\" dir=\"ltr\">Absolutely &#8211; construction accounting software makes managing your backlog much easier by giving you real-time backlog data and tracking all your job costs automatically. It can help you with project schedules, crew assignments and financial forecasts.<\/p>\n<p class=\"PlaygroundEditorTheme__paragraph\" dir=\"ltr\">The accounting software will also help contractors get a clear picture of where every project stands and:<\/p>\n<ul class=\"PlaygroundEditorTheme__ul\">\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"1\">Keep track of how many months of backlog you actually have<\/li>\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"2\">Compare what you&#8217;ve contracted against what you&#8217;ve actually completed<\/li>\n<li class=\"PlaygroundEditorTheme__listItem\" value=\"3\">Make smarter choices about which jobs to bid on next<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Successful contractors are always planning ahead to make sure they have plenty of jobs scheduled. \u00a0This process is also referred to as building a construction backlog. Tracking your backlog allows you to forecast future earnings, allocate the proper resources for each project, and ensure projects are delivered on time and within budget. A backlog in construction provides valuable insights regarding &#8230; <\/p>\n<div><a href=\"https:\/\/www.foundationsoft.com\/learn\/the-importance-of-backlogs-in-the-construction-industry\/\" class=\"more-link\">Read More<\/a><\/div>\n","protected":false},"author":60,"featured_media":22009,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_searchwp_excluded":"","inline_featured_image":false,"footnotes":""},"categories":[9,41,7],"tags":[],"class_list":["post-21996","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-articles","category-blog-category","category-recommended-reading"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.0 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>The Importance of a Construction Backlog for Contractors<\/title>\n<meta name=\"description\" content=\"Leverage construction backlogs to secure 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